Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

Figure 5.18
Profit target exit on an extension out of a 3-wave move.
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BASIC FEATURES AND PARAMETERS OF PHI-ELLIPSES
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trade in a prof it). The total move in the direction of our signal might
continue, but we are content with the profit that we have realized with
the Fibonacci count. Two additional conditions are that there has to be
at least one 3-wave move within the 21 days and that the price move
must stay within the shape of a PHI-ellipse (see Figure 5.19).
If the price move on our established position follows the shape of
a PHI-ellipse, a f ifth exit rule must be considered. We can wait until
the market price reaches the end of the new PHI-ellipse and exit the
position at the end of the PHI-ellipse. This exit rule requires the most
patience and the strongest discipline, but it has the biggest prof it po-
tential of all f ive exit rules in our analysis of PHI-ellipses.
Figure 5.20 illustrates how to exit a position on the end of a
PHI-ellipse.
Figure 5.19
Profit target exit on a Fibonacci count of 21 days.
Figure 5.20
Profit target exit on the final point of a PHI-ellipse.
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132
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PHI-ELLIPSES
Attaching PHI-ellipses, as explained in the f inal exit rule, is the
perfect approach for catching the rhythm of markets, but of course,
market rhythms are not always ideal and perfect.
The following section explains how to work with PHI-ellipses as
geometrical Fibonacci trading tools.
WORKING WITH PHI-ELLIPSES ON DAILY DATA
Working with PHI-ellipses is easy if we understand the rationale be-
hind them. PHI-ellipses develop over time. The magic of PHI-ellipses
is that the perfect form exists inherently from the beginning; but as
users and investors, we only recognize the PHI-ellipses at their very
end. Although all PHI-ellipses share a common key structure, their
f inal forms vary, becoming thick or thin, long or short. They are indi-
vidual manifestations of smaller trend moves or part of the bigger pic-
ture of a circumventing major trend.
The high in downtrends and the low in uptrends of the correc-
tion wave 2 in our wave count determine the slope of a PHI-ellipse.
Because we always need three points to draw the f irst picture of a
PHI-ellipse, we then have two possibilities. In the f irst case, the low
of the correction in wave 2 in an uptrend is above the bottom of wave
1 (vice versa for highs instead of lows in downtrends). Depending on
whether we have a 38.2 percent, 50.0 percent, or 61.8 percent cor-
rection, the slope of a PHI-ellipse will be bigger or smaller (see Fig-
ure 5.21).